Managing a business can be a complex task, but one that’s hugely rewarding. While there are many jobs to consider, such as building a reliable team and managing cash flow, it can be immensely satisfying to see your company thrive.
One of the most common queries that business owners ask us is what they should do with the surplus cash in their company. This can often be a tricky one to answer, as there can be many different factors to consider.
At a time when many businesses are feeling the pinch, it’s also particularly important to think carefully about this decision. If you want to know some useful ways to manage your surplus cash, read on for five useful strategies you might want to consider.
1. Save it in an easy-access account
According to a recent study by KPMG, one-third of Brits are planning to reduce their household spending this year as the cost of living crisis bites. This could pose a problem for many small and medium-sized businesses (SMEs) as you may see a fall in income.
This is why, if your company has surplus cash, it may be useful to keep some of it in an easy-access account as an emergency fund. Doing so can help your company to overcome difficult periods, enabling you to keep up with your outgoings, such as wages.
Having a reserve of cash can help to give you greater peace of mind to know that you have something to fall back on when times are tough. That being said, you should be wary of holding too much of your wealth in this way.
For a start, easy-access accounts typically offer a low rate of interest. This can mean that, in periods of high inflation, this cash may lose value in real terms.
Furthermore, while the Financial Services Compensation Scheme (FSCS) ensures that you can receive up to £85,000 if your bank goes into administration, anything over this limit could be at risk.
Due to this, you may not want to hold more than this amount in a single account. If you have more than this in cash, consider spreading it around more than one financial institution.
2. Deposit it into a high interest account
If you already have an emergency fund in place, another option is to keep any surplus cash in a savings account with a higher interest rate. This can be a good way to make sure it works hard for you.
Of course, as with the easy-access savings account option, there is a limit on how much wealth you can keep with any particular bank and still be protected by the FSCS. This is why it can be useful to spread any surplus cash between several different banks.
However, while this will help to protect your cash if the worst was ever to happen, doing so could mean that you have to sacrifice a small amount of interest. This would obviously mean that your wealth wouldn’t grow as effectively as possible.
3. Consider a business notice account
As you’ll know, business growth can often ebb and flow and an astute owner needs to be able to tell which way the wind is blowing. If you feel confident in your ability to do this, you may prefer to keep some of your cash in a notice account, which offers better returns but limits the access to your funds.
As the name implies, notice accounts require you to inform your bank beforehand when you want to withdraw money. This is typically a set amount of time, such as 30 or 60 days.
This can offer you more flexibility than if you locked your money away with a bond, and offer you a higher savings rate than if you kept your cash in an easy-access account.
4. Invest it in your business
If you want your business to thrive, it can sometimes be a good idea to reinvest your surplus cash. Doing so can help to increase your company’s efficiency and boost profits in the long term.
For example, upgrading machinery and IT equipment can help your staff to work more effectively, reducing the time needed to do jobs.
Alternatively, offering better pay rates and perks for your staff can be a valid option. This can be beneficial in two ways as not only will they be more motivated, but this can also reduce your company’s staff turnover rate.
5. Invest it
Taking too much money out of your business can result in an unwanted tax bill. However, leaving money languishing in low interest accounts means your money isn’t working for you.
Investing this surplus cash in funds, bonds, or other assets can potentially generate more money that you can reinvest in your business. Diversifying into other securities can give your business multiple revenue streams while it also gives your surplus cash a chance to grow.
There are many different options for what to do with surplus cash in your business, but if you want to use it in the most effective way, you may want to consider seeking professional advice.
Working with a financial planner can help you to weigh up your options and make a properly informed decision. This can give you greater confidence that you’re building your business in the right way and giving it the best chance to thrive.
Get in touch
If your business has surplus cash and you want advice on how to use it effectively, please get in touch. Email hello@sovereign-ifa.co.uk or call 01454 416653.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
